March 22, 2024, 7:24 am | Read time: 6 minutes
Rising prices in cryptocurrencies like Bitcoin and the growing popularity of digital currency are prompting more and more investors to put their money into this market. What tax considerations should be taken into account? TECHBOOK reveals it.
Companies, business owners, and private individuals are treated differently for tax purposes. This also applies to investments in cryptocurrencies, which are subject to taxation. This article assumes private investment transactions. The money was not invested in cryptocurrencies on behalf of another person.
Do cryptocurrencies have to be taxed?
The basic answer to the question is “Yes.” Buying and selling cryptocurrencies (Bitcoin, Ethereum, and others) are considered “private sales transactions” and are therefore taxable.
Whether an amount actually flows to the tax office depends on other factors. Important in this context: This article assumes direct investments in a cryptocurrency. The taxable person has thus purchased a cryptocurrency directly on an exchange or marketplace. Investments in crypto-based ETFs or other securities are taxed differently.
Cryptocurrencies and traditional securities differ in tax treatment
Anyone who opens a securities account at their bank is familiar with the “exemption order for capital gains.” Traditional investments in stocks, fund shares, or ETFs are subject to capital gains tax, which is levied at a flat rate. It is often referred to as “withholding tax” because it is deducted directly at the source, namely by the bank managing the account.
In Germany, cryptocurrencies are considered other economic goods. And because trading is considered a private sales transaction, profits are taxed at the individual tax rate as part of the income tax return. The tax rate thus depends on the tax bracket and the amount of annual taxable income. In tax terms, cryptocurrencies are more similar to gold, paintings, art, or antiques.
When must cryptocurrency be taxed?
While private trading in cryptocurrencies is subject to tax, this does not mean that one actually has to pay money to the tax office. This is the case under two conditions:
- The cryptocurrency or parts of it are sold again within one year of acquisition.
- The total of all private sales transactions exceeds an exemption limit of 600 euros for the assessment period 2023 and before. After the passage of the Growth Opportunities Act, this limit rises to 1,000 euros for the year 2024 and beyond.
So anyone who bought Bitcoins 366 days ago does not have to pay taxes on the proceeds from the sale. This speculation period starts anew with each purchase. Taxes are only payable on a sale within the period if the income exceeds the exemption limit.
Also read: The best software wallets for storing cryptocurrencies
How and where are taxes on cryptocurrencies to be paid?
Those who invest their money in cryptocurrencies do not need to report the holdings and their value to the tax office. Only when profits (or losses) arise from them must they be declared in a tax return. Those who do not already have to do this because of income from self-employment or rentals must also file a tax return as an employee.
The income is reported in the income tax return in the “SO” annex for “Other Income.” There is a section for “Other Economic Goods.” Filling out the form is not difficult. The date of purchase, sale, as well as the purchase price and sale price, must be entered. Therefore, it is also important to keep track of the transactions themselves to be able to provide the necessary information.
What applies to past transactions?
If, for example, it only now becomes clear to someone while reading this article that they have failed to report their profits from cryptocurrency investments to the tax office in the past, they should act as quickly as possible. The best course of action is to review the transactions of the past ten years and determine the profits for each year.
Preferably in consultation with a tax advisor, a correction of the tax return for the affected year should then be prepared. Tax experts know best how a letter to the tax office should look so that the correction is accepted and no further inconveniences arise.
Also read: How and where can you sell or exchange cryptocurrency?
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Can the tax office verify the sales?
Regarding tax payments, the legal situation is clear. Taxpayers are subject to a duty to cooperate. They must independently report their income and cannot and should not wait for the tax office to contact them.
It is therefore not a good idea to conceal and not tax profits from trading cryptocurrencies. In particularly severe cases, even imprisonment is threatened. At the very least, back payments, late fees, and penalties for delays are to be expected.
Even if trading in cryptocurrencies appears anonymous, it is not. Marketplaces and exchanges with official approval are required to verify the personal data of customers. This allows the Federal Central Tax Office (BZSt) to verify whether a taxpayer holds or has sold cryptocurrencies if in doubt.
The Federal Ministry of Finance already issued a letter to the tax authorities in 2022, providing guidance on evaluating transactions with cryptocurrencies. This official letter will be updated in March 2024. In the event of a tax audit or justified doubts by the tax office about the taxpayer’s representation, the authorities can then request numerous data and information, including IDs of individual transactions.
If the exchange or marketplace does not provide a statement of individual transactions and due taxes, it is advisable to create such an overview oneself, for example, in Excel.
What about losses?
The prices for cryptocurrencies are very volatile. Thus, it can happen that one pays more for a coin than one receives upon sale. This results in a loss. But what about taxes in this case?
Initially, the same applies to losses as to price increases. If prices fall and the cryptocurrency loses its value while stored in the wallet, the tax office is not interested. In technical terms, these are “unrealized losses.” The owners of the cryptocurrency may be annoyed, but it does not matter for tax purposes.
This is different if the loss is “realized.” This means that coins are sold at a loss. If this happens within the already mentioned holding period of one year, then, and only in this case, can an investor claim the loss in the tax return. This can then be offset against profits from cryptocurrency trading in the same year.
All hints and information mentioned in the text do not constitute investment advice or a recommendation to buy or sell securities (§ 85 WpHG).